Emerging markets still worth a look

OVER the last five years, investors in emerging-markets mutual funds have paid plenty and gotten little in return. Emerging-markets funds lost an annualised average of 3.19 per cent over the last five years, investment research company Morningstar said. Yet they are far more expensive, on average, than actively managed US domestic large-cap funds, which returned about 10 per cent a year annualised for the same period. Expense ratios for actively managed emerging-market funds were 1.55 per cent, compared with 1.15 per cent for US domestic large-caps.

Investors have responded by fleeing emerging markets; money is churning out of the sector's funds and exchange-traded funds (ETFs). Total net outflows hit a new high in 2015, when nearly US$75 billion exited, according to EPFR Global in Cambridge, Massachusetts. Till June this year, US$7 billion more has been withdrawn.

The exodus is understandable, given both the returns and the worrisome headlines streaming in from around the globe. Just last month, the British referendum to leave the European Union roiled markets worldwide. MSCI's Emerging Markets Index fell as much as the British-focused FTSE 100 in the days just after the ballots were counted. The vote was an additional bedevilment for emerging markets already made skittish by slower growth in China - some commentators fret about a real estate bubble and banking crisis there - and a political crisis in Brazil. On top of that, low prices for commodities, especially oil, sapped stock markets in places dependent on natural resources, such as Russia, South America and the Middle East.